Analysts at Moody’s expect recent hurricanes in the U.S. and the Caribbean to drive substantial losses for alternative capital providers, but the insurance-linked securities’ (ILS) sophisticated investor base is expected to be willing and able to replace any lost capital. Moody’s, like numerous other insurance and reinsurance market analysts and observers, has underlined the test facing the alternative reinsurance space following the impacts of hurricanes Harvey, Irma, and Maria.

ILS, third-party, or alternative capital is now embedded in the global reinsurance market, and its increased presence and utilisation by insurers and reinsurers suggests losses for market players.

“We expect alternative capital providers to sustain substantial losses from the three hurricanes, particularly for those writing collateralised retrocessional and ILW contracts,” explained Moody’s, in a global insurance and reinsurance industry note.

Since the storms made landfall the question on many people’s lips has been how the ILS market will respond to its first major test, and if investors might run from the reinsurance market, especially the property catastrophe segment.

“We think there is plenty of capital on the sidelines ready and willing to replace capital lost or withdrawn from the market by current investors, particularly if pricing increases next year.

“Although a handful of catastrophe bonds have defaulted over the years, Hurricanes Irma and Maria are the first real test of the market due to a large amount of alternative reinsurance capacity covering Florida and Caribbean risks,” said Moody’s.

And while some investors in the ILS space are likely chasing yield, the vast majority of ILS capital, according to Moody’s, “is supplied by sophisticated investors seeking high relative returns that are largely uncorrelated with the capital markets.”

Ultimately, Moody’s feels the hurricanes provide the alternative reinsurance capital space with an opportunity to show its real value proposition to buyers of reinsurance protection, by paying claims quickly and ensuring investors understand the losses they might face.

Regarding renewals and the storms, Moody’s says the “key wildcards” includes the availability of retro cover, which increasingly comes from ILS vehicles.

“The depletion of available retrocessional capacity will result in higher retro pricing and is likely to have a ripple effect that also drives property catastrophe reinsurance rates higher,” explained Moody’s.

Adding; “We expect significant losses from Maria to flow to the retrocessional market, but circumstances could vary significantly by reinsurer depending on the extent of Puerto Rico exposures.”

Widespread uncertainty remains surrounding the losses from the hurricanes, and it will take some time for the full losses to materialise and the subsequent impact on the alternative reinsurance market to be understood.

“Ultimately, we will know more in the months ahead how impacted transactions perform and whether cedants continue to find value in the alternative market relative to traditional reinsurance,” said Moody’s.